IFRS and GAAP Accounting Compared
Currently, almost all US businesses follow Generally Accepted Accounting Principles (GAAP) when creating financial reports. All this could change if the US decides to adopt International Financial Reporting Standards (IFRS) that most of the other countries in the world use to create their reports. There are quite a few differences between the two methods, and here are some of the key variations.
- First, IFRS is specifics-based, while GAAP is rules-based. The difference is that in specifics-based accounting, the preparer may have a little more flexibility in reporting and accounting for specific transactions, and that worries people who support the rules-based system. Other than that, there are three major categories of differences between GAAP and IFRS.
- Requirements of the standards. One area that is quite significant in requirements is in consolidation, which is when companies blend results from their subsidiaries or other operations, especially if they don’t have full ownership in these operations. These differences in how companies consolidate can have an invasive effect on financial statements. There are major differences in how asset impairment, intangible assets, and liability recognition are handled, as well.
- Choices companies can make. Under IFRS, companies can choose different alternatives when they format their income statements, and what format they choose can change the financial outcome. There are other choices in IFRS that do not appear in GAAP regulations, too, and accountants will have to understand the different choices and how they affect the bottom line of the organization.
- Levels of detail they must go into. One of the biggest differences between the two methods is the level of detail required in both. There is a significant level of detail in GAAP, while IFRS offers less detailed guidance and less detail in the reporting. This shows up especially in revenue recognition and the more complex accounting issues like derivatives. The detail shows in the size of the regulations. GAAP regulations take up more than 17,000 pages, while IFRS regulations only number about 5,000 pages.
While the two methods have many similarities, there are enough differences to indicate that they could affect financial outcomes in the switch over to IFRS standards. GAAP is much more complicated than IFRS, so in the end, it may make accounting practices easier, after accountants get used to the new rules.